What could be more important than efficiency?

Efficiency is a measure of how well transformation of matter or energy occurs. To be efficient means to get the most from the least. The higher the efficiency, the better the transformation is occurring. Efficiency is usually computed from the ratio of useful output to input. To be accurate, the computation must take into account all inputs to a process; otherwise, the computed efficiency may exceed 100%. This will imply that the transformation process itself is creating new matter or energy, which contradicts fundamental laws of physics.

Since energy transformation always produces waste heat, the energy efficiency of any process is always less than 100%. If some of the material outputs are not usable (e.g., wastes), then the sum of the useful material outputs will be less than the sum of the material inputs too, and the material efficiency of the process will likewise be less than 100%.

Economists often express the inputs and outputs of a process in monetary terms, because their interest is in processes where the monetary outputs exceed the monetary inputs. Furthermore, economists often compute the difference instead of ratio between outputs and inputs, because their interest is in absolute monetary amounts instead of ratios. In such cases where the focus is on absolute amounts, this paper uses the term “gain” instead of “efficiency.” An example of gain is the producer’s profit, which is revenues minus costs. Another example is the total utility to the consumer of a set of goods minus the total price of these goods.

Because both are measures of output relative to input, gain is closely related to efficiency and is used whenever absolute magnitudes are more important than relative magnitudes.

Among business firms, gain is really of more interest than efficiency, the best firms being those who manage to squeeze the last marginal bit of gain (i.e., profit) from their business operations.

Among natural persons, the output of interest is not necessarily matter, energy, or money but a vaguer concept like welfare, utility, or happiness, which makes measuring efficiency or maximizing it harder.

Like firms, economies today also tend to maximize gain (i.e., efficiency and inputs), not only efficiency. To maximize gain, one can increase the inputs to a process, or the efficiency by which the inputs are transformed into outputs, or both. Expanding one’s global reach is one way of increasing inputs. The economies-of-scale argument (higher efficiency through larger scale of operations) also supports a global strategy. Thus, gain-maximization strategies directly lead to globalization.

Because economies include all firms and natural persons, macro-efficiency is very difficult in practice to maximize or even simply to measure. To cope with this problem, economists have settled on a curious rule for improving the efficiency of economies step by step: improve somebody’s welfare without reducing anybody else’s, and keep doing this until nobody’s welfare can be further improved without reducing somebody else’s. This is the economist’s Pareto efficiency, which is obviously lower than full theoretical efficiency, but is itself a theoretical construct that is hardly ever seen – not even approximated – in reality.